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Chevron Saying Yes To $25 Billion Expansion In Kazakhstan Would Be A Bullish Move

January 6 2015, 10:12

Summary

- Formed in 1993, Tengizchevroil or TCO, is developing two massive oil fields in Kazakhstan.

- If the Future Growth Project is sanctioned, the consortium would spend $25 billion USD to boost oil production at the Tengiz and Korolev fields by ~265,000 bo/d.

- Once the expansion is complete, TCO's Future Growth Project would grow Chevron's company-wide oil/liquids production by 7.65%.

Tengizchevroil LLP, abbreviated as TCO, was formed back in 1993 by Chevron (NYSE:CVX) and the Republic of Kazakhstan to explore and develop the massive Tengiz oil field. Discovered in 1979, the Tengiz Field originally had 26 billion barrels of oil in place. Located close by, the Korolev Field, which is also being developed by TCO, originally had 1.5 billion barrels of oil in place. Both fields also hold substantial amounts of natural gas and natural gas liquids. The consortium sees 6 billion - 9 billion barrels of oil ultimately being recovered from the two fields, which would imply a recovery rate of 21.8% - 32.7%. Production from the two fields started up in 1993, seekingalpha.com reports.

From 1993 to 2012, TCO pumped out 2 billion barrels of oil from the two fields. Through the end of 2014, TCO produced an additional 400 million barrels of oil, leaving at least 3.6 billion barrels of oil to be produced. Currently, TCO is 50% owned by Chevron, 25% by Exxon Mobil (NYSE:XOM), 20% by state-owned KazMunayGas, and the remaining 5% is owned by Lukoil (OTCPK:LUKOY). Chevron's share of that in 2013, through its stake in TCO, was 243,000 bo/d, 347 MMcf/d of natural gas, and 20,000 bpd of NGLs.

Expansion leads to production growth
In the third quarter of 2008, TCO completed its Sour Gas Injection and Second Generation Plant expansion, doubling the production capacity of TCO. The expansion boosted the capacity of the Tengiz and Korolev fields to 600,000 bo/d and 750 MMcf/d of natural gas. Some of the gas that is produced is injected back into the two fields to keep reservoir pressure high. Since 2000, TCO has invested $2.9 billion in reducing the environmental impact of developing the Tengiz and Korolev fields. That investment helped TCO reduce its total gas flaring volumes by 93%, and is a big reason why TCO's current gas utilization rate is over 99%.

The natural gas that TCO produces is considered sour because of the high levels of hydrogen sulfide in the gas. As TCO processes out the hydrogen sulfide, it is able to produce sulfur that is eventually sold to various markets. During the first nine months of 2014, TCO produced 1.7 million metric tons of sulfur. Over that same time period, TCO sold 2.8 million metric tons of sulfur as it reduced the amount of sulfur stored in its Tengiz storage facility to less than 580,000 metric tones.

To ramp up production, the consortium may move forward with the Future Growth Project. If they do, the expansion would increase oil production from the field to 290 million barrels (795,000 bo/d), versus 193 million barrels (530,000 bo/d) in 2012. Overall production, which includes natural gas and NGLs, would go up by 250,000 - 300,000 BOE/d. Chevron has a lot to gain from the Future Growth Project. If approved, it would boost Chevron's oil/liquids production by ~130,000 bo/d, resulting in 7.65% company-wide oil/liquids growth and 5.06% total production growth for Chevron (based on its Q3 2014 numbers).

Assuming the lowest recovery rate and the highest production rate, TCO still has enough reserves to pump out 795,000 bo/d for 12 and a half years. Through the Future Growth Project, Chevron plans to ultimately increase the expected recovery rate of the field. Based on how well TCO's operations are going so far, it would be reasonable to assume that the recovery rate could end up landing on the high end of its guidance. At 32.7%, TCO would be able to pump out 795,000 bo/d for another 18.6 years. That rate could end up being much higher due to technological advances in the oil industry.

Implementing the Future Growth Project includes drilling 190 additional production and injection wells, building new sour gas injection plants, and implementing TCO's wellhead pressure management program. This allows TCO to keep the reservoir's pressure high, supporting additional production wells which allows the consortium to ramp up production. Current estimates put the cost of the three part plan between $20 billion USD - $25 billion USD.

Chevron
During its Q3 2014 conference call, Chevron's VP and CFO Pat Yarrington had this to say about the TCO expansion (emphasis added);

"Yeah. So, I mean, obviously, this is a very attractive asset for us. It's one of the critical assets that we've got in the company, strong earnings, strong cash flow and it has the potential we think to grow even further. There are two perspective elements of that project that I think are important to separate out. One is the Wellhead Pressure Management Project. It's really designed to keep existing capacity -- processing capacity full.

And the second is a project for the growth that really could add 250,000 to 300,000 barrels a day, taking full field growth production up to around 1 million barrels a day. So it's a very exciting project. We are working very aggressively with our partners and with the government -- the Kazakhstan government to progress this project through to final investment decision."

Chevron and its partners have yet to make a final investment decision on the expansion, as they are waiting for their engineering teams to put together a final cost for the project. After the design is complete and a final cost is given, I expect the consortium will sanction the expansion. Chevron seems keen on moving forward with the Future Growth Project. Conventional oil and gas production, even when factoring in the added cost of processing sour gas, is generally very profitable.

Final thoughts
Chevron's production base has been slowly eroding away over the past few years, falling from 2.764 BOE/d in 2010 to 2.568 million BOE/d last quarter. Over the next few years, Chevron plans to revive its upstream operations by bringing new fields online in the Gulf of Mexico and completing more wells in the Permian Basin. Combined with its other expansions, Chevron plans to grow its output to 3.1 million BOE/d by 2017. Farther out, the TCO expansion would provide Chevron's upstream operations with another big shot of production growth that will keep the momentum going.

With a 3.8% yield and strong growth prospects, Chevron is a good buy in the energy sector. So far Chevron has already delivered on part of its growth promise. This year, Chevron raised its production growth guidance in the Permian Basin (article), brought the Tubular Bells and Jack/St. Malo projects in the Gulf of Mexico online (article), found a partner to develop the emerging Duvernay play in Canada, and progressed with its drilling program in the Vaca Muerta shale formation down in Argentina. Investors looking for a safe way to play the rebound in oil/gas prices should take a look at Chevron.

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